The roles of capital in the management of rubber ...Narumon Preuksa, Buncha Somboonsuke, Jitti...

Journal of Agricultural Technology 2013, Vol. 9(5): 1055-1068

1055

The roles of capital in the management of rubber smallholders’

cooperatives: experiences from southern Thailand

Narumon Preuksa1*

, Buncha Somboonsuke2, Jitti Mongkolnchaiarunya

3

and Sayan Sdoodee4

1Tropical Agricultural Resource Management Programme, Faculty of Natural Resources, Prince

of Songkla University, Hat Yai, Songkhla 90110, Thailand, 2Department of Agricultural

Development, Faculty of Natural Resources, Prince of Songkla University, Hat Yai, Songkhla

90110, Thailand, 3Department of Community Development, Faculty of Social Administration,

Thammasat University, Bangkok 10200, Thailand, 4Department of Plant Sciences, Faculty of

Natural Resources, Prince of Songkla University, Hat Yai, Songkhla 90110, Thailand

Narumon Preuksa, Buncha Somboonsuke, Jitti Mongkolnchaiarunya and Sayan Sdoodee

(2013) The roles of capital in the management of rubber smallholders’ cooperatives:

experiences from southern Thailand. Journal of Agricultural Technology 9(5):1055-1068.

The aim of this paper was to evaluate impacts of capital on performances of the rubber

smallholder’s co-operatives, RSCoop, in southern Thailand. The research conducted during

May 2010 to April 2012 with two purposive sampling cases, RSCoops A and B. Methods

employed were investigation of data from related documents, participatory observations and

key informants in-depth interviews. RSCoops A and B were established in 1994 and 1996,

respectively. On March 31st 2012, they had 83 and 170 members with 11,978.75 and

179,525.31 USD of share capital. Their financial statements in the seven year period (2006-

2012) showed that though RSCoop B had significantly more members and share capital than

RSCoop A, the profitability and management ratios were not bigger. It seemed like RSCoop A

had better business performances. However, it was found that RSCoop B had more opportunity

to grow due to its higher amount of resources owned.

Keywords: rubber-smallholder’s cooperative, share capital.

Introduction

Natural rubber from Hevea brasiliensis is very important for the Thai

economy. In 2011, there were 3,001,797 hectares of plantation areas all over

the country with 11,978.71 million USD in exports value (Rubber Research

Institute of Thailand, 2012). In 2009, 1.48 million households were growing

rubber (Office of Agricultural Economics, 2010) and 90% of these households

were smallholders who cultivate less than 8 hectares of plantation (Buncha

Somboonsuke et al., 2004).

* Corresponding author: Narumon Preuksa; e-mail: [email protected]

Journal of Agricultural Technology 2013 Vol. 9(5): 1055-1068

Available online http://www.ijat-aatsea.com ISSN 1686-9141

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Rubber-smallholder’s co-operatives (RSCoop) are rubber-farmer-owned

co-operatives. They were first established in 1994 due to the critical price of

natural rubber during 1992 to 1993. At that crucial period, the Thai

Government allocated a large amount of budget for construction of fumed-and-

smoked-rubber factories. Along with these, the rubber-smallholders were

registered as community-based RSCoops in order to manage the factories. This

was meant to help rubber smallholders raising their income, improving quality

of their rubber products and increasing their bargaining powers. Since 1994,

approximately 695 RSCoops have been established all over the country. But at

the end of 2011, only 449 RSCoops with 77,041 members and 38.1 million

USD total share capital remained active. The failed RSCoops faced many

problems, the most important of which was lack of capital. (Office of the

Rubber Replanting Aid Fund, 2009; Poonsak Intarayota and Pakdee

Buncharoen, 2007).

Agricultural cooperatives require capital to be successful as for any

business. Funds are needed to pay for operating costs, to purchase equipment

and for expansion. Cooperatives that do not adapt and that fail to mobilise

more member capital will be increasingly unable to compete with other more

efficient types of business. Currently, there are a number of changes in global

economic conditions that confront and challenge the viability of agricultural

cooperatives in the developed and developing world (Pischke and Rouse,

2004). These include:

- decreasing flows of development assistance either government departments or

international organisations;

- privatisation of state agencies and businesses e.g. state-owned marketing

boards and banks, which are susually interested in dealing with cooperatives

only as business enterprises;

- globalisation of trade and deregulation of domestic markets which are

promoting freer trade domestically and internationally and consequently

consumers often obtain cheaper goods from more efficient private providers;

- industrialisation and vertical integration of agricultural product and food

systems which are trended toward larger and larger agro-industrial and retail

food chains with reduced costs at all stages between farmers and consumers.

Lacking capital not only leads to insufficient liquidity but also makes the

cooperatives unable to cope with the changing environment. In order to use

cooperatives as a tool for improving farmer’s quality of life, RSCoops need to

prepare themselves to deal successfully with those situations. Enough capital is

a key factor for it.


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This paper will evaluate and compare impacts from different-sized

capitals on performances of RSCoops in southern Thailand while ways to build

up capital will be suggested.

Materials and methods

This research was conducted during May 2010 to April 2012. Two

RSCoops in southern Thailand were selected as the case study using purposive

sampling technique.

The profitability and management ratios were analysed using data from

the cooperative’s financial statements usually issued at the end of March every

year. Data for the last seven years (2006-2012) were used. The analysed

profitability measures were;

(1) gross margin to sales ratio (Prapan Sawaittanan, 1995)

= sales

100 gross margin,

(2) net profit margin ratio (Thongchai Santiwong and Chaiyot Santiwong,

1998)

= sales

100 net profit,

(3) return on equity ratio (Thongchai Santiwong and Chaiyot Santiwong,

1998)

= equity

100 net profit,

(4) return on assets ratio (Thongchai Santiwong and Chaiyot Santiwong,

1998)

= assets

100 net profit,

(5) reserve capital to sales ratio (Mellor et al., 2009)

= sales

100 reserve capital,

(6) dividend ratio

= shareofno

dividendtotal

.,

(7) patronage refund ratio

= refundpatronage

100 net profit,

(8) other social funds allocated from net profit each year e.g.

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- amount of public fund

- amount of educational fund

- member welfare fund to no. of member ratio.

T-tests were used to compare the differences of means of each measure.

Other impact aspects were analysed using data from participatory observations

and key informant in-depth interviews.

Results and discussions

General information of the case study

RSCoop A and RSCoop B are both located in the same sub-district, but

different villages, in a Southernmost province of Thailand (Figure 1). They

were established in 1994 and 1996 with only 50 and 38 members, respectively.

RSCoop is a village-based cooperative. Thus, its regulation on membership

states that its members have to be the villagers of where the factory is located

or someone who lives elsewhere but owns a rubber–plantation in that village.

In 2002, there were 208 and 333 households in the villages where RSCoop A

and RSCoop B are situated.

Each RSCoop owns a fumed-and-smoked-rubber factory which was

funded by the Thai Government. The construction cost for one factory was

about US$93,750. Before approving the allocation, a land for the factory

location had to be prepared. RSCoop A has borrowed land from two members

and the members have been annually paid for the land use. RSCoop B used to

borrow a plot of land from its member. But experience of other RSCoops had

revealed conflict between landlords and cooperatives and made its board of

committee (BOC) to decide to buy that land. At present, RSCoop B has

ownership of that land.

Businesses of the RSCoops

There are two main businesses of both RSCoops. They are: Collecting

rubber latex from their members to produce smoked-rubber sheets. In the

process of production, latex will be made into raw-rubber sheets before being

put in the rooms to be dried and smoked (Figure 2), Selling goods including

fertilisers and raw rice for their members. Both RSCoops do this business but

in quite small transactions.


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Fig.1. Locations of the RSCoop case studies

Source:http://www.embassyworld.com/maps/Maps_Of_Thailand/

Fig. 2. Production process of smoked-rubber sheets

Financial performance impacts

Membership and share capital

Data on share capital and the number of members of the case study during

2006 to 2012 are shown in Figure 3. The numbers of members of RSCoop A

and B, who are regular members, have increased from 64 to 83 and from 115 to

170, and the rates of increase are 29.69 and 47.83 percent, respectively. While

the share capitals of both RSCoops have increased from 3,372 USD to 11,979

USD and 20,884 USD to 179,525 USD, the rates of increase are 255.25 and

459.64 percent, respectively. It can be seen that both RSCoops have been

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growing in both membership and share capital. The values of each share of

both RSCoops are equal, which is 0.3125 USD. When comparing the means of

the share capital and number of member ratios, it was found that they were

significantly different. Each member of RSCoop B held higher a larger number

of shares than that of a member of RSCoop A (Table 1). At the same time,

RSCoop B can attract more members than RSCoop A as the ratio of the number

of member per total households of each village were 40 and 51 percent,

respectively.

Table 1. Share capital and no. of member ratios of RSCoop case studies

Year RSCoop A RSCoop B

2006 52.69 181.60

2007 53.65 356.15

2008 54.75 554.55

2009 107.98 772.53

2010 108.85 865.38

2011 119.38 982.44

2012 144.32 1,056.03

t-test for equality of means = 1.426, Sig. at 0.05

Fig. 3. No. of members and values of share capital of RSCoop case studies during 2006 to

2012

Way to build up share capital

The two RSCoops have different ways for building-up the share capital.

RSCoop A collects share capital once a year, at the period around the end of

each accounting year while RSCoop B always deducts 1% of latex value and

then adds into the share capital account of each member. The deduction will be


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made every time members sell latex to the cooperative. RSCoop B has set this

as a rule for several years as it found that most people prefer to pay often but in

a small amount rather than paying once a year but in a huge amount.

Profitability and management ratios

The analysis of financial data in the past seven years (2006-2012) in

terms of profitability and other management results that affected the success of

the cooperatives and the benefits for members and community are shown in

Figure 4–13 and Table 2. Ten measured ratios were calculated and the means

between the two RSCoop cases were compared. All the measured ratio values

show that both RSCoops have good businesses performances. These could lead

to the success as all the ratio values were high. But when comparing the means

of all the measures between the two, it was found that the gross margin to sales

ratio, reserve capital to sales ratio, dividend to number of share ratio, patronage

refund to net profit ratio, the amount of public fund allocated per year and the

amount of educational fund allocated per year, were not significantly different.

The ratios with significant differences in the means were the net profit margin

ratio (A > B, Sig. at 0.01), return on equity ratio (A > B, Sig. at 0.05), return on

assets ratio (A > B, Sig. at 0.05) and member welfare fund to no. of member

ratio (A>B, Sig. at 0.01). It can be seen that, the bigger capital a cooperative

has does not mean the higher profitability it will get. The reason behind this

was the higher administrative costs of RSCoop B especially on more equipment

and personnel. But, it is assumed that when its business grows bigger, the

percentage of the costs and total business will be reduced and profitability will

increase.

Table 2. Profitability and management ratios

Ratio RSCoop A RSCoop B

t x x

Gross margin to sales ratio 7.35 6.14 1.72

Net profit margin ratio 5.85 3.96 2.52*

Return on equity ratio 56.01 37.16 3.56**

Return on assets ratio 52.86 31.27 3.73**

Reserve capital to sales ratio 2.85 2.25 2.14

Dividend to no. of share ratio 0.68 0.81 0.30

Patronage refund to net profit ratio 57.96 56.82 0.30

Amount of public fund allocated a year (USD) 1,016.50 1,074.15 -0.21

Amount of educational fund allocated a year

(USD) 1,097.59 1,464.22 -0.48

Member welfare fund to no. of member ratio 882.86 551.76 2.81*

* Sig. at 0.01 ** Sig. at 0.05

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Fig. 4. Gross margin to sales ratio

Fig. 5. Net profit margin ratio

Fig. 6. Return on equity ratio


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Fig. 7. Return on assets ratio

Fig. 8. Reserve capital to sales ratio

Fig. 9. Dividend to number of share ratio

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Fig. 10. Patronage refund to net profit ratio

Fig. 11. Amount of public fund allocated per year

Fig. 12. Amount of educational fund allocated per year


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Fig. 13. Member welfare fund to number of members ratio

Other management performance impacts

The research results showed that even though RSCoop B had larger

capital than RSCoop A, it did not make higher profitability. Nevertheless,

other management impacts could be found as follow:

As higher capital can build higher reliability to creditors (United States

Department of Agriculture, 2007), money was lent to RSCoop B by a teacher

cooperative to buy the land which its factory is located on. Consequently,

RSCoop B has had its own land since 1998 while RSCoop A still uses the land

lent by two of its members and the cooperative still has to pay them for the use

of land every year. Data from interviewing some key informants revealed that

the landlords have negotiated with the BOC several times to increase the

amount of rent which is quite a bigger amount than what they have normally

received. There were experiences of other RSCoops in Thailand which had to

stop the business because the landlords did not allow access to their land

though the RSCoops factories were located on it (Kriangsak, 2011). To avoid

such conflict, RSCoop A should consider a better solution to the problem of its

land ownership.

RSCoop B has higher technology for production and management e.g.

fuel-saving ovens for rubber-sheet smoking, digital weighing machines which

make it more convenient for operation and provide them with more trust from

latex sellers, and computer equipment for accounting system which can make

daily reports for its member.

RSCoop B has created jobs for the villagers as at least four people have

been hired permanently in the cooperative office while RSCoop A hires only

one permanent staff.

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Higher capital can generate bigger business and lower prices of goods. In

this case, RSCoop B can order raw rice directly from a rice cooperative in

north-eastern Thailand. One six-wheel-truck load of raw rice is usually made

to one order. Thus, it can sell lower-price rice to its members than RSCoop A

who orders smaller amounts from a wholesaler in the district-town. RSCoop B

has planned to acquire more equipment and machines to improve and expand

its production capacity e.g. automatic rubber sheet producing machines and a

ten-wheel truck. RSCoop B’s BOC has more time and flexibility for the

management tasks, especially in decision-making and planning, as they do not

have to work routinely in the factory because of they have permanent staffs to

do it while RSCoop A’s BOC does not. RSCoop A has only one staff, so the

BOC also has to work in the factory but do only some tasks e.g. record latex

weights of each member and deliver rubber products to the buyers.

It can be concluded from all the results that both RSCoops have been

successed in making profit. However, this good performance still has to be

further improved. Financial management is a key to operating cooperatives, as

it involves managing assets such as cash, accounts receivable, inventories, fixed

assets, and investments in other organisations. Sufficient number of members

or equity capital and sound financial position must be maintained to continue to

be acceptable to creditors, suppliers, or buyers of cooperative products (United

States Department of Agriculture, 2007).

The bigger capital of RSCoop B had not made higher monetary

profitability than RSCoop A but RSCoop B has more capability and

opportunity to grow due to their higher assets, human resources and

membership. As Chesnick (2000) stated that goals of cooperatives are different

from a company, the objective of a company is maximizing the value of the

owner’s interests in the firm while cooperatives have goals other than

generating direct profits for their members. Thus, in the cooperative

environment, the interdependence giving rise to the theory of profit

maximisation generally would not hold true. Benefits of ownership are not

gained from the appreciation of the cooperative stock value, but from assured

access to competitively priced supplies, assured product market through the

cooperative, or simply access to goods and services not available elsewhere.

Furthermore, the greater the amount of capital held by the cooperative, the

greater its ability to purchase more efficient technology, invest in staff training

and education, and make other improvements in its business (Pischke and

Rouse, 2004).

In conclusion, developing business of the cooperative to be strong enough

for coping with the changing environment is vital. For cooperatives as a whole,


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growth is a prime indicator of success. However, for the individual

cooperative, growth can be used to reduce the burden of fixed administrative

costs, but once administrative costs as a percentage of total business have

stopped declining, then further growth may not be an important objective

(Mellor et al., 2009). Though the research results showed that the bigger

capital of RSCoop B had not made higher profitability than RSCoop A, the

greater amount of capital can raise its ability to make improvements in

business, management and social aspects. So, it is more capital is required.

The method which RSCoop B has been using for building up its share capital is

suggested to be applied by other RSCoops.

Acknowledgments

This research paper is a part of a Ph.D. dissertation in Tropical Agricultural Resource

Management Programme of the Faculty of Natural Resources, Prince of Songkla University. I

would like to convey thanks to the Faculty of Natural Resources and the Graduate School of the

Prince of Songkla University for providing research budget and for all conveniences and

supports.

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(Received 21 June 2013; accepted 31 August 2013)

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